Empty construction site | Should contractors use business interruption insurance to protect from coronavirus losses?

The spread of the novel coronavirus (COVID-19) has already begun to show its potentially devastating impact on businesses around the world. And the construction industry is especially at risk, as it relies heavily on a steady supply chain of materials, goods, and labor. As contractors and suppliers weigh their options, they may consider adding a new insurance policy to cover unexpected losses. Does business interruption insurance make sense for construction during the coronavirus pandemic?

As transportation bans, embargoes, quarantines, and other government responses to contain the outbreak continue, the availability of materials and workforce may prove challenging in the months ahead. Construction companies may need to anticipate some loss of income. As contractors scramble to find ways to protect themselves while waiting to secure new projects, business interruption insurance may be a viable option to protect against coronavirus losses.

What is business interruption insurance?

Business interruption insurance is a policy that’s meant to compensate your business for lost revenue and other expenses if forced to shut down due to natural disasters or other devastating events. This is not a separate insurance policy, but rather an additional coverage to an existing commercial property insurance policy.

This type of coverage insures lost revenues, rent or lease payments, relocation costs, employee wages, taxes, and even loan payments. And these financial losses will be covered during the time period it takes to restore business operations.

The coverage and protection can even be increased to supply chain and other related losses.

Essential reading: The Coronavirus Survival Guide for Construction Businesses

Contingent business interruption insurance

With regular business interruption coverage, your business losses are covered when incidents cause direct, immediate losses to your business. Contingent business interruption insurance covers losses associated with losing a key supplier, business partner, or main customer(s) due to an incident. This is an additional protection you can elect to purchase under the insurance policy. It pays for expenses incurred while searching for a new supplier or customer.

Since COVID-19 is threatening to disrupt business, this seems like an obvious decision. Right?

Well, there’s a caveat.

Coverage under typical business interruption policies

Physical damage requirement

Since this type of insurance coverage is an add-on to commercial property policies, claims are typically tied to some sort of direct physical loss or damage to the insured property. The initial purpose of business interruption insurance is meant to aid in recovery from physical damage caused by events (perils) such as natural disasters or fires.

Communicable diseases and viruses are typically not covered. In fact, many business interruption policies specifically exclude infectious diseases from their coverage.

Losses caused by civil authority actions

There are some policies that include business income losses caused by the actions of “civil authority” – ones that impair or restrict access to the business. This seems to fit in line with imposed curfews, quarantines, and transportation restrictions.

However, depending on the policy language and the jurisdiction, many courts still require that the business losses were a direct result of the damage to the property.

Considering that the coverage for events like the coronavirus pandemic seems spotty at best, it doesn’t seem worth the extra expense. But the insurance industry has already begun to respond.

Look at your contract: Does a force majeure clause cover delays caused by coronavirus?

Insurance industry response to coronavirus

Insurance Services Office (ISO), an insurance advisory organization, has recently declared that it will provide business interruption endorsements in response to the coronavirus.

An insurance endorsement is typically used to add additional or otherwise alter the coverage under an existing insurance contract. Under these endorsements, the policy will be expanded to circumstances without property damage. Specifically to cover suspension of business operations due to government-ordered quarantines or other closures. A second endorsement would also include coverage in the event public transportation is limited or restricted.

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Evaluating your insurance coverage

This is an important time for both construction companies and insurance companies alike. For construction companies, it’s time to evaluate the coverage under your current policy. The scope and coverage will vary depending on the language of the contract. And serious consideration should be given to protect against direct and indirect losses that can be incurred during this pandemic. As for insurers, this may be the time for more companies to consider expanding their coverage for disease outbreaks like the coronavirus.